Johannesburg, 30 June 2017 — Global Credit Ratings has affirmed the national scale ratings assigned to African Banking Corporation Tanzania Limited of BB(TZ) and B(TZ) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until June 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to African Banking Corporation Tanzania Limited (“BancABC Tanzania”, “the bank”) based on the following key criteria:
The ratings of BancABC Tanzania reflect its extremely weak asset quality and more critically the vulnerability of its capital to problem assets. The rating also takes into account demonstrated shareholder support and ongoing efforts to turn the bank around, including a newly established management team. The ‘Stable’ rating outlook reflects the recovery in operating performance in FY16, and our expectation of continued focus by the bank to manage down its non-performing loans (“NPLs”).
The bank’s capitalisation remains moderate, with a risk-weighted capital adequacy ratio of 14.6% (FY15: 14.3%) against a statutory requirement of 12%. The bank’s level of equity has improved since FY12 supported by multiple capital injections from its parent. The bank’s total regulatory capital was TZS35.5bn at FY16 (FY12: TZS11.5bn), well above the regulatory minimum of TZS15bn. The bank’s weak internal capital generation (FY16: 0.7%), high asset quality risks and the potential negative impact of IFRS 9 implementation, increases solvency risk.
The bank’s gross NPL ratio increased to 30.3% at FY16 (FY15: 27.4%), while specific provisions covered only 36.4% (FY15: 35.0%) of impaired loans at FY16. As such, BancABC Tanzania’s very high balance sheet exposure to net NPLs (NPLs net of provisions were 116.8% of total regulatory capital at FY16) remains a significant risk. Impaired loans include legacy loans amounting to TZS39.8bn at FY16 (61.1% of total impaired loans), which the bank is in the process of recovering. However, progress has been slow and the eventual outcome and timing remains uncertain.
The bank posted an after-tax profit of TZS391m in FY16 (following consecutive losses between FY11 and FY15) driven by interest income growth of 23.9% and cost containment measures. However, the bank’s ROaE (0.8%) and ROaA (0.1%) were very low in FY16, providing a weak buffer to absorb credit losses.
Liquid and trading assets comprised 42.3% (FY15: 39.3%) of total assets at FY16, which provides adequate headroom to counter the liquidity risks associated with the short-term maturity structure of the bank’s funding.
A substantive improvement in asset quality metrics (including considerable progress in NPL workouts), as well as a track record of improving earnings, and further strengthening of capital buffers, could enhance the ratings. Renewed capital pressure driven by additional credit losses on legacy problem exposures or elevated NPL generation in new lending, a deterioration in earnings and liquidity indicators, and adverse macroeconomic developments, could see the ratings come under pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2009)|
|Long-term: BBB-(TZ); Short-term: A3(TZ)|
|Last rating (June 2016)|
|Long-term: BB(TZ); Short-term: B(TZ)|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
BancABC Tanzania rating reports (2009-16)
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
African Banking Corporation Tanzania Limited participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to African Banking Corporation Tanzania Limited with no contestation of the rating.
The information received from African Banking Corporation Tanzania Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2016 (and four years of comparative numbers)
- Unaudited management accounts up to 30 April 2017
- Budgeted financial statements for 2017
- Latest internal and/or external audit report to management
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Industry comparative data
The ratings above were solicited by, or on behalf of, African Banking Corporation Tanzania Limited, and therefore GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS SECTOR GLOSSARY
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||Refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. An appropriate level of capital adequacy ensures that the entity has sufficient capital to support its activities and that its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent.|
|Corporate Governance||Refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Equity||Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Long-Term||Not current; ordinarily more than one year.|
|Long-Term Rating||Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|National Scale Rating||Provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Outlook||Indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Securities||Various instruments used in the capital market to raise funds.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short-Term||Current; ordinarily less than one year.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Tier 2 Capital||Secondary capital is mainly made up of subordinated debt, portfolio impairment and 50% of any revaluation reserves and other specified regulatory deductions.|
For a detailed glossary of terms please click here
GCR affirms African Banking Corporation Tanzania Limited’s rating of BB(TZ); Outlook Stable